- In the first quarter of 2023, futures linked to the MSCI EAFE Index registered the highest ever net-short positions, which coincided with the fall of Silicon Valley Bank.
- Going into the second quarter, traders’ net positions in futures linked to the MSCI EAFE and MSCI EM Indexes have returned to pre-SVB banking crisis levels.
- In an attempt to adapt to changing market conditions, leveraged funds such as hedge funds and Commodity Trading Advisors have historically taken both net long and short positions in regional futures.
The recent demises of Silicon Valley Bank (SVB), Signature Bank and Credit Suisse Group AG spooked the credit markets while the broad equity market remained relatively resilient. Derivatives markets played a pivotal role during the crisis period, as market participants made use of short and long futures, as well as options positions, to effectively manage risk exposures. Investors have found multi-country, multi-currency futures useful for risk management, benchmark tracking, efficient market access and liquidity management purposes. Multi-country, multi-currency futures are linked to indexes that span multiple markets and time zones and investors looking to leverage pockets of liquidity could target specific trading sessions when seeking to execute larger orders.
In this blog post, we analyze net positions (long-short) of various markets participants based on Commodity Futures Trading Commission’s (CFTC) Traders in Financial Futures data.1 In summary, we found that market participants increased their net short futures positions on the MSCI EAFE and MSCI EM Indexes for a brief period in March 2023, but it has subsequently reverted to the pre-crisis levels.
Investors turned to regional futures to hedge exposures
Market participants entered 2023 with a net short futures position linked to the MSCI EAFE and MSCI EM Indexes. This was against a backdrop of high inflation, monetary tightening, lower economic growth and continued geopolitical tensions. However, as the SVB banking crisis unfolded in March 2023, investors quickly adjusted their index futures exposures to adapt to the changing market dynamics (as shown below).
Changing futures exposure during the banking crisis
Source: Commodity Futures Trading Commission’s (CFTC) Traders in Financial Futures data.
Futures linked to the MSCI EAFE Index witnessed their highest ever net-short positions build-up for the week ending March 14, 2023, mainly driven by an increase in short positions as investors tried to manage their developed-market risk exposures in anticipation of the contagion effect. However, by the end of first quarter, net positions reverted to levels seen at the beginning of the year as regulators stepped in to stem further damage. In contrast, investors in futures linked to the MSCI EM Index were net short around 30,000 contracts leading up to the banking crisis, but then cut their net shorts following the collapse of SVB and reinitiated net shorts toward the end of the quarter. Investors may not have considered the collapse of SVB to pose contagion risk in broader emerging markets and have moved on to focus on previous macro issues like inflation and growth.
Futures positioning based on market participant classification
The sell-side market participants represented by dealer positions in the charts below have held net-short positions on futures linked to MSCI indexes over the years, offsetting their risk across markets and clients. Conversely, asset managers and institutional investors have held net-long positions over these years.
Net-short vs. net-long positions of market participants
Leveraged funds and other reportable traders, such as corporate treasuries and central and smaller banks, form a relatively lower proportion of the total positions in futures linked to the MSCI EAFE and MSCI EM Indexes. Leveraged funds, which may take outright directional views on the markets, have held both net-long and -short positions over the years as shown in the charts below. This is contrary to the net-long-only positions held by asset managers and institutional investors. Leveraged funds reacted quickly during the SVB banking crisis and moved from net short to net long on futures linked to the MSCI EM Index, while they reduced their net-long futures positions on the MSCI EAFE Index (based on futures positions for the week ending March 7, compared to the week ending March 28).
Net positions of leveraged funds
Investor jitters endure
Even though the broad equity markets have remained relatively calm and futures positions have returned to their pre-SVB crisis levels, investors still maintain net-short future positioning on the MSCI EAFE and MSCI EM Indexes while considering the potential of various adverse outcomes. This speaks to continued investor jitters in a market that remains unsettled.
1The Traders in Financial Futures (TFF) report by CFTC provides a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC.
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